Bootle: Recovery will be sluggish and protracted

The near-term outlook for the economy has improved but there remains a huge amount of uncertainty about what shape the recovery will take, according to Roger Bootle, economic adviser to Deloitte.

Mr Bootle said at least three key factors have driven the recent improvement in the economic indicators but none seem to set the stage for a sustainable and strong recovery. Instead, he warned that the recovery would be “sluggish and protracted”.

He said: “Financial sector confidence, particularly in the banking sector, has improved but this could easily be dented again as banks still face a raft of recession-related losses.

“The turn in the inventory cycle and an easing in the pace of de-stocking will boost growth for at most a couple of quarters, and the massive boost from fiscal and monetary policy is coming to an end. In addition, the effects of quantitative easing have so far been far from spectacular and a severe fiscal tightening is looming after the general election.

“Of course, something else could take over in driving the upturn, but it is hard to see what. Slowing pay growth is largely offsetting any boost falling inflation was giving to households’ real incomes, and the real benefit from the lower pound is unlikely to be felt until global demand strengthens significantly.”

Mr Bootle said under the Government’s current plans, public sector debt as a share of GDP will not fall back below the 40 per cent ceiling previously specified by the fiscal plans until 2035. Just to get debt below 40 per cent by 2017 would mean cutting real spending by two per cent per annum – and knocking 0.7 per cent off annual GDP growth in the process.

“Even if the economy’s potential growth rate has been damaged by the recession, growth is unlikely to be strong enough to eliminate the large amount of spare capacity that has built up,” he said. 

“Deflation, rather than inflation, therefore remains the bigger risk. My main concern is the slowdown in wages growth. With unemployment set to rise by another one million or so, pay growth will slow further.

“The upshot is that there are still a number of reasons to be cautious over the medium-term outlook. At least the economy looks likely to be growing next year – an improvement on the outlook just a few weeks ago.”

Despite improvements, Mr Bootle said he expected modest growth of just 0.5 per cent. In 2011 he predicts growth will be a lacklustre 1.5 per cent.

“It is important not to forget that the UK is emerging, not from a normal recession, but from a recession caused by a banking crisis,” he said.

“Credit remains a big problem, both its supply and demand. It could take years both for banks’ risk appetite to return and for firms and, in particular, households to deleverage and want to borrow more.

“We are therefore likely to see a much weaker economy than those typically seen after previous recessions. What’s more, it is not impossible that the economy slips back into recession.”


To read Roger Bootle’s full Q3 Economic Review report click here 


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